Where are we?

•CCompanyompany

•CConsumersonsumers

•CCompetitorsompetitors

•CConditionsonditions• PESTPEST

Growth &Growth & Competitive Competitive StrategiesStrategies

FinanceFinance

HRHR

ProductionProduction

R&DR&D

MarketingMarketing

Functional Functional IntegrationIntegration

Profits Mrkt Share ROA ROS ROE Asset T/O Stock Mrkt Cap

Step#1

Situation/SWOT Situation/SWOT AnalysisAnalysis

Strategic Strategic PlanningPlanning

Functional Functional IntegrationIntegration

Performance Performance AssessmentAssessment

BUSINESS PLAN GUIDELINE

1.Where are 1.Where are we now? we now?

2.Where do we 2.Where do we want to gowant to go

3.How do we 3.How do we get there?get there?

= Situation Analysis

You are finding answers re:

How the market is segmented & the relevant criteria that influence consumers use in their purchasing decisions

The nature & magnitude of the competition

Existing & emerging Economic & Technological trends that will impact demand, pricing, product design & positioning

Consumers

Competitors

Conditions

5 SEGMENTS

Cheaper too-$.50 drop in price/year

SENSOR INDUSTRY ONGOING GROWTH..the entire market growing at around 14 - 15% per

year.

010000

2000030000

4000050000

6000070000

Year1

Year2

Year3

Year4

Year5

Year6

Year7

Year8

EXTERNALEXTERNALConsumer, Competitive &

Macro- EnvironmentUNCONTROLLABLE

Social

TechnologicalPolitical

Legal

Economic

Corp./Business STRATEGY

Financial Management

Marketing Management

Production & HR Management

INTERNALINTERNAL Environment

CONTROLLABLE

CompetitiveDemographic Psychographic

trends

Forces

Regulatory

Next ….

Consumer

Company

Competitors

Conditions

Situation-Analysis

EXTERNAL ENVIRONMENTOpportunities & Threats 

     

INTERNAL ENVIRONMENTYour Company's

Strengths & Weaknesses:

1st KEY Q:1.Is what you are

making any good?

Strategic Thinking- the ten big ideas - the ten big ideas

4. Portfolio theory-

GE-(three-by-three matrix, using business strength & market attractiveness as variables).

The Boston Consulting Group (BCG) introduced its two-by-two matrix-(invest in the stars, divest the dogs, milk the cows, and solve the question marks)

Portfolio Analysis

Which Brands should receive more/ less/ no investment- based on:

Product Position/ Potential

Profitability/ Margins Market-Growth/Market-

Share Matrix

Competitive Strategy

G.E Strategic Planning Model

Strong Average Weak Business StrengthBusiness Strength

Industry Attractiveness

High

Low

Business Strength Index Industry Attractiveness Index

* Market Share * Market size * Price Competitiveness * Market Growth * Product Quality * Industry Profit Margin * Customer Knowledge * Amount of Competition * Sales Force and Effectiveness * Seasonality * Geographic Advantage * Cost Structure

Boston Consulting Group’s Growth-Share Matrix

HighHigh

Relative Relative Market ShareMarket Share

HighHigh LowLowLowLow

DOGSDOGSCASH COWSCASH COWS

Prod

uct-M

arke

t Pr

oduc

t-Mar

ket

Gro

wth

(%)

Gro

wth

(%)

STARSTARSS PROBLEMPROBLEMCHILDCHILD

10x 4x 2x 1.5x 1x .5x .2x .1x

Strengths & Weaknesses:·        Marketing & R&D

Evaluating Your Company’s Marketing

2nd Big Q1.Is what you are

making any good?

2.Is “how you are making it”—any good?

“Generically, profits are driven by the company’s

asset base and by its efficiency

working those assets”

Evaluating Your Company’s Production & HR

S I M U L A T I O N

M A N A G E M E N T

Last but not Least-

Various Measures of Your

PROFITABILITY

Profitability Ratios: ROS---Return on Sales ROA—Return on Assets ROE-- Return on Equity

Net ProfitsCum Profits

““ROS indicates percentage of each ROS indicates percentage of each sales dollar that results in net income.”sales dollar that results in net income.”

Main ratio of ProfitabilityReturn on Sales

Return on Sales =Return on Sales = net profitnet profit

net salesnet sales

How Profitable is your Firm?

ROS

Contribution Margin

Financial Guidelines: Profitability-ROS & Margins

Contribution Margin below 30%,Contribution Margin below 30%, Problem = Marketing (customers hate your products),

Production (your labor & material costs too high), or Pricing (you cut price too much).

Contribution Margin is above 30%…Contribution Margin is above 30%… but but Net Margin Percentage is below 20% … Net Margin Percentage is below 20% …

Problem= heavy expenditures on Depreciation (perhaps you have idle plant) or on SGA

(perhaps you’re pushing into diminishing returns on Promo & Sales Budgets).

Net Margin above 20%,Net Margin above 20%, but ROS below 5%.. ROS below 5%.. ----you either experienced some

extraordinary "Other" expense like a write-off on plant you sold, or you are paying too

much Interest

IF:

“Generically, profits are driven by the company’s

asset base and by its efficiency

working those assets”

How effective/aggressive R-U in building your Co’s asset base…

It takes $$ to Make $$

&-why not make it using somebody else's…. To help you make even

more…

How effective/aggressive R-U in building your Co’s asset base…

At outset should be spending ~$10-25M / round on plant improvement

By end should expand asset base to min $140M to $160M+

Assets/Equity – simulation takes owner's perspective.

A Leverage of 3.0 says, "For every $3 of Assets there is $1 of Equity

Leverage     Assets     Debt     Equity

1.0   $1   $0   $1

2.0   $2   $1   $1

3.0   $3   $2   $1

4.0   $4   $3   $1

LEVERAGE:

1.8 to 2.8

OptimalOptimalCorp assets fin.w/ debt

“Generically, profits are driven by the company’s

asset base and by its efficiency

working those assets”

Return on Assets

Return on Assets = = net profit

assets

““ROA measures company’s ability to use all its assets to generate earnings.”

ROA 100%+ 50%+ ~10% <10%

Ratio World     Class  

Top            10 cut Mean Poor 

Asset TurnoverReveals how effective assets are at generating sales revenue.

The higher the better = more efficient use of assets

Asset Turnover =sales

assets

You are generating $1.05 in sales for every $1 assets

ERGO:

…if you effectively build your asset base & efficiency work those

assets

Stocks

Market Share

Profit$

Return on EquityReturn on Equity = =net profitnet profit

equityequity

Profitability * Asset Mgt * Leverage

As measured by ROE

Encompasses the 3 main levers used by mgt to generate return on investors equity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxx xx

Value Chain

Profitability * Asset Mgt * Leverage

Return on EquityReturn on Equity = =net profitnet profit

equityequity

Du Pont Formula

Return on Equity =Return on Equity =net profitnet profit

equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxx xx

Value Chain

Du Pont Formula

Return on Equity =Return on Equity =net profitnet profit

equityequity

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxx xx

Value Chain

Ratio World Class

Top 10 cut Mean Poor

ROE* 600%+ 100%+ ~20% <15%

net profitnet profit

salessales

salessales

assetsassets

assetsassets

equityequityxx xx

Value Chain

Profitability * Asset Mgt * Leverage

Improve ROE by:Improve ROE by:

Increase sales &/or reduce &/or eff. work assets

Improving Margins

Increasing Leverage

ERGO:

…if you effectively build your asset base & efficiency work those

assets

Stocks

Market Share

Profit$

STOCK PRICE Function of:

1. Earnings per Share

Net Profit / # Shares

2. Book Value Equity / # Shares

3. Dividend Policy Good Dividend Policy

Financial Guidelines

Re: Liquidity

You’ll be left w/less revenue than

anticipated PLUS production &

inventory carrying costs that must be

paid..

IF You Produce a crappy product &/or Your Competitors produce a

better product &/or You produce too much product

Then

You’re left w/less revenue than anticipated and did not plan & allocate enough cash to cover your production & inventory

carrying costs....IF

ThenBig Al arrives -- pays your bills, and leaves you with a loan & a stiff interest

payment

•Maintain Adequate working

capital & cash reserves

In order to:

•Have realistic/ accurate

sales forecasts

•Avoid “Big AL”

& a Liquidity

Crisis-

Need to:

EVALUATE theStrengths & Weaknesses of your Financial Situation

Situation SWOT Analysis

Consumer

Company

Competitors

Conditions